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Shares of cloud computing and platform visualization software and services company VMware, Inc. (NYSE: VMW) could have further upside on top of their 56 percent gain year-to-date, according to one analyst.

The Analyst

BMO Capital Markets analyst Keith Bachman upgraded his rating on the shares of VMWare from Market Perform to Outperform and increased his price target from $136 to $142.

The Thesis

Following the release of VMware's fiscal third quarter results, Bachman raised his estimate for the company's compute business from an earlier estimate of a 1-2 percent decline to 3 percent growth in fiscal 2019. (See Bachman's track record here.)

The growth, according to the analyst, would come from on-premise spending rather than the cloud.

Though the management suggested returns from VMware's partnership with Amazon.com, Inc. (NASDAQ: AMZN)‘s AWS may not forthcoming for the next two years, BMO Capital Markets said it expects AWS to contribute to revenues in 2019.

"Further, while the change in fiscal year likely helped working capital during FY18, we believe that solid revenue and deferred revenue growth, along with operating margins that we believe could remain in the 33 percent-plus range, suggest that FCF should continue to grow close to 10 percent over the next few years," the analyst said.

VMware's free cash flow-based valuation is compelling, according to BMO Capital Markets. Although the firm prefers Microsoft in terms of slow growth software, it said VWware shares can move higher.

The Price Action

At the time of writing, VMware shares were rallying 2.52 percent to $123.14.